Marty Epstein, FCAS, MFE Global Auto Actuary, AIG Casualty Actuaries of Greater New York (CAGNY) December 6 th , 2012

or

 Broadest definition: the technology of

collecting, sending, receiving and/or storing information via telecommunication devices

 The three most popular Telematics products in use: in vehicle navigation systems, stolen vehicle recovery systems and fleet management systems  A distant 4 th most popular product is what current discussion focuses on most: Pay How You Drive, Pay As You Drive, or User Based Insurance

 Telematics products are most common in countries with high rates of theft (Italy, Brazil, South Africa) or in expensive, sophisticated markets (UK, Western Europe, United States)  Penetration of Telematics products is globally very low but expected to grow gradually until product is commonplace (10-20 year timeframe)

    Too expensive for most markets  Hardware is pricy, though becoming cheaper  Data plans must be purchased for each device Too complicated  Operationally complex  Data volumes can be massive, challenging to interpret  Pricing implementation is a challenge Intellectual property/patent claims on existing technologies act as a barrier to entry Most insurers are taking a wait and see approach or investing smaller amounts in pilot projects to test program viability

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Smartphone’s are now being piloted to enhance or replace dedicated boxes for the collection and transmission of driving data

 Mobile only solution is a fraction of current operational costs with the advantage of piggybacking on the customers own mobile plan  Also, the user experience can be dramatically enhanced as context relevant information can be displayed immediately after completing a trip and a variety of additional services can be made available  Mobile phone solutions have their own drawbacks, such as estimating the risk of the phone owner which may not be the same as the vehicle risk Some countries have plans for mandating Telematics  Singapore plans to mandate use Telematics devices to determine fees for driving on public roads  Brazil seeks to reduce theft through mandatory Stolen Vehicle Recovery systems

  Risk models that use Telematics data will soon consider the context of driving events, advancing sophistication  Current models adopted in the US market that determine price credits from mileage, braking, accelerating and speed data may be considered crude relative to their potential accuracy  Some examples of driving context: ▪ How do you evaluate a drivers risk if she exceeds the speed limit but travels at the average speed of other drivers on a particular road segment at a particular time? What if she is driving in inclement weather?

▪ Is a driver more risky if you learn that he often brakes midway through a turn rather than before the turn?

▪ What is the risk difference between a driver who rarely texts while driving and one who frequently texts while driving? What if the “texter” only does so while the vehicle is not in motion?

Psychological profiles are being mapped to driving data as a way to understand and explain driving behavior but also to predict behavior of customers in situations outside of driving

   Most common incentive for enrolling in Telematics in the US is the potential for premium reduction:  Progressive: “you could save up to 30% extra for your good driving”   State Farm: “you have control of how much you save, with the opportunity for discounts up to 50%” Additional services are offered by some programs, for example, State Farm’s In-Drive program (monthly fee based):  Allstate: “rewards safe drivers with the big savings they truly deserve” Get help locating your vehicle if stolen  Vehicle diagnostic reports  Emergency response notification  Monitor high-risk drivers in household, such as teen or elderly drivers Pay as you drive offers a way for low income and uninsured drivers to acquire insurance

       Context specific driver education  Praise for things you did right, guidance for things you could improve Eco driving (feedback on your CO2 footprint and how to improve) eCall (in vehicle emergency service call button)  Planned for the EU in 2015 Claim submission and accident reconstruction  First notice of loss (identify location and time of crash, allow user to attach photos of damage)  Verify facts such as speed prior to impact, location of impact(s), estimate likelihood of property damage and soft tissue damage; reduces fraud risk Gameification / social networking  Prizes for “safest driver” User portals with detailed information on driver behavior Targeted driver safety training and alerts for families with inexperienced or elderly drivers

  Insurers will have an opportunity to dramatically change the interactive experience with their customers What can be learned about your driving behavior will be used to help predict your behavior in other situations (subject to user agreements)  Insurers will have an opportunity to understand their customers behavior in ways only dreamed of until now  Human behaviors to be measured such as: aggression/calmness, focus, consistency, thrill seeking, avoidance, pacing

    Pandora’s box of nearly unlimited, intimate data is open, whether we like it or not Insurers have been loathe to use the stream of data out of fear of being called “big brother” or seen as taking advantage of privacy standards Technology focused companies are jumping in to driver safety space with new ideas that have the power to transform the insurance business How will customers make a value judgment as to whether they should share their data?  Worst-case scenarios have mostly been speculative so far

 Will the addition of Telematics data to loss cost analysis result in a significant or only marginal lift in predictive power?

 Does the use of Telematics data bring us too close to individual risk rating? What might be the unintended consequences?

 Telematics models indicate that many drivers ought to receive a surcharge rather than a credit for their riskier than expected driving – US insurers currently only provide price discounts (no discount for riskier drivers) -- is this sustainable long-term?